Auditing the Auditors

Kurt Kofford

Consider these scenarios:

1. You just received a regulatory notice in the mail from the government agency that regulates your company or organization, informing you that the audit of your company didn’t meet the required standards. The notice uses threatening language to spell out the negative consequences of not complying. What went wrong?
2. You just received your company’s audit report in the mail and you realize that you have had very little interaction with your auditors. Instead of reaping the side benefits of insights and recommendations from the auditors outside perspective developed while auditing your organization, all you got were the pieces of paper you are required to give to the bank. What went wrong? Could this situation have been changed by taking different steps when choosing a CPA firm?

Aren’t all financial statements audits created equally?

The answer is a definite no! Audits are not a commodity in which one gallon of gas is just like the next. Yes, there is a large body of professional standards to guide all auditors in the performance of an audit and reporting on financial statements, but there is a wide variance in actual practice as to how those standards are followed.
The professional auditing and reporting standards are broad enough and flexible enough to allow for the uniqueness of different companies and organizations and the different approaches of CPA firms performing the audits. This is as it should be, because no two organizations are alike and professional judgment is still the most important element of an audit.

When an audit is not an audit

Unfortunately, in my 26 years as a CPA and an auditor, and my experience over the last four years on the Colorado State Board of Accountancy, I have learned that some audits are better than others, and a few are downright bad. There are many factors that go into creating a superior audit, including the approach, skills, knowledge and time allocated to the audit. Most of these are factors in arriving at the cost of an audit, yet many organizations and companies select their auditors on the basis of cost alone as if the audit by one CPA firm is the same as the next.

How big is the problem?

No one knows for sure how many sub-standard audits there are, but recent studies in certain sectors have revealed concerning deficiencies. Substandard audits have become enough of a concern for the department of Housing and Urban Development (HUD) that they are considering a proposal to require any auditor performing an audit to be submitted to them to be from an approved list, which would allow them to exclude auditors who have not been performing audits up to the required standards.

What to Do? Our Recommendations

The first thing to consider is the competence and longevity of the firm or accountant that you are engaging to audit your company. How long have they been in business? What is the firm’s professional standing and experience in your industry? Do they list references in their proposal for similar work and similar industries that they have done work for in the past? Check the Web site for the Colorado State Board of Accountancy to see if they have had any complaints filed against them. Not only should you find out if the CPA firm is a member of American Institute of Certified Public Accountants (AICPA), but you should inquire how they have used their membership to improve their audit quality. For example, the AICPA has Audit Quality Centers for specialized areas such as employee benefit plan audits, where members can join to access resources to improve the quality of their audits. Also, check to see if they are in good standing with the Colorado Society of Certified Public Accountants (CSCPA). Both organizations require audit firms to conduct tri-annual peer reviews (an audit of the auditors).

Ask them for their most recent peer review report and discuss the finding of their peer review with them to determine what suggestions for improvement were made.

And of course, it’s important to take a detailed look at the proposal. Are they proposing in writing that your company’s needs will be met and to the proper regulations? When looking at proposals to decide on a CPA firm, many companies put together an audit committee to come to a decision as a group.

In my position with the State Board of Accountancy, I’ve seen situations where businesses or organizations have made bad decisions in choosing CPAs when it came to their audit. These situations haven’t made headlines, but bad situations happen more than what I would like to see.

The Bottom Line

Selecting an auditor based only on cost is not a good idea. Often the old axiom applies “You get what you pay for”, so make sure you are reaping the benefits that an audit should bring to an organization.